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Déjà vu: Venezuela announces need to restructure

Nicolás Maduro

This year, specifically on August 11, I had pointed out the challenges that the government of Venezuela was facing in terms of its finances.

In my concluding remarks, I had also specifically stressed the point that debt repayments were more challenging than ever and thus one should consider closing off positions held on both a sovereign level as well as via PDVSA, the state owned oil company.

On November 3, Venezuela’s President Nicolás Maduro announced the intention to restructure the country’s debt given the unsustainable path going forward. As expected, reputable credit rating agencies, such as S&P, acted immediately by downgrading the foreign currency sovereign rating to CC from CCC-.

In its rationale, S&P recognised the fact that a restructuring would be a distressed exchange and equivalent to a default.

An important signal to investors was the use of its grace period, which for the avoidance of doubt, is a period after a payment becomes due, usually 30-days and stated in the prospectus.

In my view, this was a crystal clear signal that the country is indeed heavily struggling to meet its financial obligations. Interestingly enough though, such move was based on the fact that the country had to garner enough dollars to meet its PDVSA debt maturities.

The establishment is blaming the recently imposed sanctions by the US, which in all fairness does negatively affect the financing preposition as it prohibits refinancing or restructuring existing debt.

In principal, it blocks US-regulated institutions from buying new bonds. It is an unprecedented situation for bondholders, who have limited recourse as long as sanctions are in effect.

As many expected, market reaction was unmuted with harsh pressures felt on short-dated bonds which plummeted to just over 55%, pushing bond prices closer towards default levels rather than distressed levels.

An unfortunate coincidence was also the released statement by the International Monetary Fund (IMF), which called on the country to find remedies to address breaches of its membership.

In my view, despite this not being material news to the current financing turmoil, it is indeed a concerning fact that explicitly shows the country’s lack of commitments in terms of disclosure reporting.

It is no news that throughout his rein, Maduro was always in denial on the country’s debt burden and the negative implications of lower oil prices. With his last statement, he is now acknowledging the fact that the situation is clearly unsustainable and an emergency call on the way going forward should be taken immediately.

To conclude, we are at very early stages and it is uncertain if the restructuring will be composed of any haircut, maturity extension, lower coupons or a combination of all.

Now, what we call in the credit world ‘recovery value’ is undoubtedly on investors’ minds. I think this is a clear example of greed. Investors over the past years have rightly so been carried away by impressive returns (and the famous, or infamous, high coupons) and yes, they did lock-in remarkable gains.

However, lately, the writing was on the wall given the political turmoil, in addition to other important factors, which were tainting the country’s credibility of a sustainable path.

Personally, I’m very surprised that Venezuela took so long to admit its financial troubles. Over the past year, breathing space was being given by the loan agreement with China and Russia. Now even that support seems to be a closed path.

Disclaimer: This article was issued by Jordan Portelli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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